For an industry built on listening, NT$3 billion is a high price to pay for not listening to your customers.
It was one of the promises of the dot-com boom: any piece of music you like, downloaded and played instantly. Nobody now remembers the Taiwan Internet startup, Music Zone, but it was one of several companies around Asia that attracted millions in investment based on a business that centered around selling music online. The overhyped company collapsed at the end of 2000, and many of its competitors followed it into oblivion--those that survived made little money selling music online.
The problem was that without agreement from major record labels, online music retailers could not sell any music from well-known artists. And record companies simply did not believe in the concept of downloadable music.
Record labels were comfortable doing business as they had done it for decades, selling a physical product, the CD, through retailers. They saw no need to change. In fact, they believed that once they had let the digital genie out of the bottle, by releasing songs in digital form, there was a great danger the music would quickly be pirated on illegal networks, and sales would rapidly fade away as people began to download music for free.
As a result, what little music was available online was expensive, and came with a laundry list of legal and technical restrictions. You could not make more than one back-up copy of a song, for example, you could probably only listen to it on one computer, and you most certainly could not copy it onto a CD. Customers wanted quick and easy music downloads, but were unenthusiastic about the clumsy and overpriced legal services, so many of them turned to sources of pirated music. Legitimate companies selling music on the Internet received, at best, a trickle of revenue.
Then, toward the end of last year, something changed. Cash-starved online music sellers suddenly began to get calls from investors. Major companies, like Acer spin-off BenQ, began to look for ways to get into the business. Online music was hot again. The reason was not to be found on these shores, but thousands of miles away in Cupertino, California, at the headquarters of US computer manufacturer, Apple Computer Inc.
Apple's iTunes music service, launched early in 2003 sold over 70 million songs in its first year, and has since gone on to top 130 million, at about US$1 each. In other words, Apple's famously persuasive CEO, Steve Jobs, had done something that it seemed nobody else could. He cajoled record companies into allowing him to sell their music through the Internet, and without most of the restrictions that they had placed on other online music merchants.
His success took the music industry almost completely by surprise and had dramatic implications for the download market worldwide, including Taiwan. As the popularity of iTunes became clear, Taiwan's moribund music download market began to show signs of life.
First up to the plate was iMusic, launched at the end of last year, although it did not really begin selling music online until April. The company, ultimately owned by Era Communications Corp., has signed licensing agreements with all of the major international record labels, as well as some local ones, giving it access to a library of around 500,000 songs.
Next up was BenQ. Taiwan's largest maker of mobile phones and PC peripherals is hoping the music business will help it sell even more hardware. The company is marketing its new music service, Qband, alongside portable music players like the Joybee 125. BenQ is taking a leaf out of Apple's book herethe US company makes little or no profit on music sales through its iTunes service, and a lot on sales of iPod music players and personal computers. GigaMedia, best known for its cable broadband Internet network is also working on a service, Gmusic. And foreign online music sellers are beginning to see Taiwan as an attractive target for expansion, after all, the island is one of the most wired nations in Asia.
In a recent survey, the Taiwan Network Information Center (TNIC) reported that more than half of Taiwan's 12.7 million Internet users had high-speed broadband connections--one of the highest levels (proportion) of broadband use in the world. One million new users have begun using the Internet since the TNIC's last survey, a year ago, and the number is expected to continue to increase.
Almost mirroring the rise in Internet use, local music industry revenues have been sliding for several years, down 57 percent since 1997. The government's Council for Cultural Affairs reports that in 1997 local industry sales were a reasonably healthy NT$11.6 billion (US$351.5 million), but by 2002 they had slumped to NT$4.9 billion (US$148 million), and are still falling. Assuming Taiwan's music markets work in the same way as those overseas, then about half this fall in sales--around NT$3 billion dollars--can be attributed to Internet music piracy.
With the success of iTunes in the US, the local record industry has begun to accept that the Internet could actually help reverse those falling revenues. The unexpected popularity of downloadable ring tones for mobile phones has also made it clear that selling music over the Internet is an idea whose time has come.
Contrary to record label fears, online music will actually help them sell more, say proponents. "Record industry revenues have been decreasing for at least the last three or four years. I believe digital music will help increase that. To give just one reason: if you walk into a traditional record store, less than 10 percent of all the music available is actually in the store. But with a large digital music catalog, you can effectively make all the music available to anybody to download, globally. We've found the more music you put in front of customers, the more they buy," says Domenic Carosa, CEO of DestraMusic, an Australian online music seller which is planning a move into Taiwan in partnership with an unnamed local company.
In fact, young people in Taiwan are downloading music--lots of it. They are even paying millions of dollars a year for it. The only problem is: the record companies and artists that own the copyright on all those songs have hardly seen a penny of it. Vincent (he preferred not to give his full name), a 30-year-old employee in a public relations company, is typical. "I buy CDs sometimes, but more often I download music from the Internet, probably about 20 songs a month. I use the Kuro software. It's convenient and fast, I get exactly what I want--but most important of all, it's cheap."
Vincent pays about NT$100 (US$3) per month to use the Kuro system, on top of that he pays Internet access fees of perhaps NT$600 (US$17) to NT$800 (US$23) a month (a fast broadband connection is an important tool for downloading music). How much of that do record companies and artists get? None of it.
Market Intelligence Center media analyst, Hung Chuen-huei, estimates the market for music sold online will not exceed US$3 million this year--as a result of rampant piracy on the P2P networks. Taiwan is unique in Asia for the high visibility of some of the more dubious download services. Companies like Kuro and EzPeer advertise in magazines and on the side of city buses, and claim to have as many as a million users between them. They work in partnership with respectable local businesses, like convenience-store operator, President Chain Store Corp., to collect payment from customers. According to record labels, Kuro users have access to over five million pirated music files. Kuro and EzPeer did not respond to a request for an interview.
The situation is so bad that it is actually deterring new entrants to the local music download market.
"There is a rampant battle going on in Taiwan between the incumbent P2P offenders, and the recording industry, and we think that we'd rather wait until there's some clarity on where that's headed," says Sudhanshu Sarronwala, CEO of Singapore-based Soundbuzz, which sees Taiwan as a very attractive market for music download services--if the P2P piracy problem can be controled.
Kuro and EzPeer are drawing sales away from the more legitimate services like iMusic and Qband. "The [music download] services that have already launched in Taiwan have felt the impact of the P2P networks continuing to flourish," says Sarronwala, former head of MTV Asia, who founded Soundbuzz in Singapore in 1999, and is selling music online there, in India, and (by the end of this year) in Hong Kong.
"Taiwan is different from say, Singapore or Hong Kong, where undoubtedly Internet piracy takes place, but it's not advertised on the side of buses," he says.
Companies like Kuro and EzPeer are in a legal gray area. They do not sell pirated music. However, they do provide software that helps people who share music online get in touch with each other to download songs, and they charge a monthly fee for use of this system. Fundamentally, they are similar to the original incarnation of Napster, the US-based file-sharing company that was shut down after being successfully sued by major record labels.
Indeed, the record industry, in the shape of the local arm of the International Federation of the Phonographic Industry (IFPI) has been pursuing legal action against Kuro and EzPeer. Last year, the IFPI began filing copyright infringement suits against a small number of EzPeer and Kuro users. One user admitted liability and the courts suspended his indictment in return for a public apology--the other cases were dropped. The industry organization also began to press the government for action against the file sharing services themselves. In August, the Taipei District Prosecutors' Office took heed, filing charges against three of Kuro's directors, and another of the network's hundreds of thousands of subscribers.
Although no independent data is yet available for Taiwan, and both Kuro and EzPeer claim their subscriber base continues to grow, similar legal strategies have had a chilling effect on illegal music file-sharing elsewhere in the world.
And there are other, less visible strategies being employed. "Record companies do what they call spoofing," explains Domenic Carosa of DestraMusic, "which means populating P2P networks with rubbish files, making it far harder for the downloaders to find what they want. So once people have had a fairly negative experience, we're hopeful that they'll start using the legal services."
Faced with out-of-control movie piracy in Asia, the film industry slashed the prices of movies sold on Video CD in several countries in a fairly effective attempt to make piracy financially unattractive and change consumer behavior. The record industry has not yet embraced this tactic; however, industry insiders believe that price cuts for digital music are on the way.
Of the NT$35 (US$1) typically paid for a downloaded music track anywhere in the world, 60 to 70 percent goes to the record label as a royalty fee. This rate is in fact similar to that paid on CDs. If you buy all the songs on a CD as downloads, the total cost will probably be a little higher than the cost of the original CD. This is despite the fact that there is no need to make a CD, a CD jewel case and packaging, or to ship it to a retailer. Soundbuzz CEO Sarronwala predicts record labels will begin to cut this royalty fee significantly within one to two years, and the price of music downloads will fall along with it.
Price is an important factor, but one of the other attractions of downloading music is the instant gratification aspect. There is no need to go out to a record store if you want to hear a song right now. So music has to be easy to buy. As Taiwan's mobile phone and online gaming service providers have found, many young people do not have credit cards. The answer is the prepaid card, sold in every convenience store. Online music retailers are looking at similar easy payment methods for music downloads.
Although it is in its early days, industry insiders believe digital music will transform the record industry. Record labels will become pure marketing machines they say, no longer concerned with packaging and shipping a physical product. And what of record stores? Can they survive beyond the CD? "They will have to change," believes Carosa of DestraMusic, "I see them becoming a place to meet other like-minded people, have a coffee, and load up your digital music player with the latest tunes. It's good having a huge database of music, but if customers are not sure what they're looking for, I think they'll still like to have personal service."
Simon Burns is a freelance writer based in Taipei.
Copyright (c) 2004 by Simon Burns.